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Tucows Reports Continuing Strong Financial Results for Second Quarter 2018

TORONTO, Aug. 08, 2018 (GLOBE NEWSWIRE) -- Tucows Inc. (NASDAQ:TCX, TSX:TC), a provider of network access, domain names and other Internet services, today reported its financial results for the second quarter ended June 30, 2018. All figures are in U.S. dollars.

Summary Financial Results
(In Thousands of US Dollars, Except Per Share Data)

 3 Months Ended June 306 Months Ended June 30
2018
(Unaudited)
2017
(Unaudited)
% Change2018
(Unaudited)
2017
(Unaudited)
% Change
Net revenue81,08784,223-4%176,882153,79115%
Net income3,6085,242-31%7,3527,686-4%
Basic Net earnings per common share0.340.50-32%0.690.73-5%
Adjusted EBITDA111,18810,3748%21,56716,71129%
Net cash provided by operating activities5,7548,131-29%15,32710,53446%
  1. This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table.

Summary of Revenues and Gross Margin
(In Thousands of US Dollars)

 RevenueGross Margin
 3 Months ended
June 30 
3 Months ended
June 30
 2018
(Unaudited)
2017
(Unaudited)
2018
(Unaudited)
2017
(Unaudited)
Network Access Services:
Mobile Services22,41120,37910,433 9,677 
Other Services1,8951,248605 302 
Total Network Access Services24,30621,62711,038 9,979 
     
Domain Services:
Wholesale    
Domain Services42,54048,5506,696 6,101 
Value Added Services4,6015,4153,853 4,800 
Total Wholesale47,14153,96510,549 10,901 
     
Retail8,4777,6634,031 3,115 
Portfolio1,163968968 783 
Total Domain Services56,78162,59615,548 14,799 
     
Network Expenses:
Network, other costs--(2,701)(2,261)
Network, depreciation and amortization costs--(1,727)(1,169)
Total Network expenses--(4,428)(3,430)
     
Total revenue/gross margin81,08784,22322,158 21,348 
       

“The second quarter once again saw solid performances from each of our businesses,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc. “The domains business delivered consistent results outside of the expected in quarter impact of the transfer of 2.65 million very low margin names in the first quarter of this year. Ting Mobile delivered increases in year-over-year revenue and margin as we work towards the next phase of customer growth.  Finally, Ting Internet continued its steady progress from network builds and expansions across the footprint to serviceable addresses, to subscriber activations, to dependable recurring monthly revenue.”

Financial Results

Net revenue for the second quarter of 2018 was $81.1 million compared to $84.2 million for the second quarter of 2017, with the decrease due primarily to the bulk transfer of 2.65 million very low margin domain names during the first quarter of 2018, which was partially offset by the continued growth of Ting Mobile.

Net income for the second quarter of 2018 was $3.6 million, or $0.34 per share, down from $5.2 million, or $0.50 per share, for the second quarter of 2017.  Net income for the second quarter of 2018 includes acquisition and transaction costs of $0.8 million related to geographic headcount and operational alignments.

Adjusted EBITDA1 for the second quarter of 2018 increased 8% to $11.2 million from $10.4 million for the second quarter of 2017. 

Cash and cash equivalents at the end of the second quarter of 2018 was $11.2 million compared with $16.6 million at the end of the first quarter of 2018 and $15.1 million at the end of the second quarter of 2017.

Notes:

1. Adjusted EBITDA

Tucows reports all financial information required in accordance with United States generally accepted accounting principles (GAAP). Along with this information, to assist financial statement users in an assessment of our historical performance, the Company typically discloses and discusses a non-GAAP financial measure, adjusted EBITDA, in press releases and on investor conference calls and related events that exclude certain non-cash and other charges as the Company believes that the non-GAAP information enhances investors' overall understanding of our financial performance.

The Company believes that the provision of this supplemental non-GAAP measure allows investors to evaluate the operational and financial performance of the Company’s core business using similar evaluation measures to those used by management. The Company uses adjusted EBITDA to measure its performance and prepare its budgets.  Since adjusted EBITDA is a non-GAAP financial performance measure, the Company’s calculation of adjusted EBITDA may not be comparable to other similarly titled measures of other companies; and should not be considered in isolation, as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP. Because adjusted EBITDA is calculated before recurring cash charges, including interest expense and taxes, and is not adjusted for capital expenditures or other recurring cash requirements of the business, it should not be considered as a liquidity measure. Non-GAAP financial measures do not reflect a comprehensive system of accounting and may differ from non-GAAP financial measures with the same or similar captions that are used by other companies and/or analysts and may differ from period to period. The Company endeavors to compensate for these limitations by providing the relevant disclosure of the items excluded in the calculation of adjusted EBITDA to net income based on U.S. GAAP, which should be considered when evaluating the Company's results.  Tucows strongly encourages investors to review its financial information in its entirety and not to rely on a single financial measure.

The Company’s adjusted EBITDA definition excludes depreciation, amortization of intangible assets, income tax provision, interest expense, interest income, stock-based compensation, asset impairment, gains and losses from unrealized foreign currency transactions and infrequently occurring items, including acquisition and transitions costs. Gains and losses from unrealized foreign currency transactions removes the unrealized effect of the change in the mark-to-market values on outstanding unhedged foreign currency contracts, as well as the unrealized effect from the translation of monetary accounts denominated in non-U.S. dollars to U.S. dollars.

The following table reconciles net income to adjusted EBITDA (dollars in thousands):

 3 months ended June 306 months ended June 30
 2018
(unaudited)
2017
(unaudited)
2018
(unaudited)
2017
(unaudited)
Net income for the period 3,6085,242 7,3527,686 
Depreciation of property and equipment1,330879 2,5621,636 
Amortization of intangible assets2,3262,063 4,6573,825 
Interest expense, net951970 1,8471,838 
Provision for income taxes1,2281,083 2,411958 
Stock-based compensation615313 1,193631 
Unrealized loss (gain) on change in fair value of forward contracts46(20)43(38)
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities282(283)459(334)
Acquisition and transition costs*802127 1,043509 
     
Adjusted EBITDA11,18810,374 21,56716,711 
*Acquisition and other costs represents transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, related to our acquisition of Enom in January 2017.  Expenses include severance or transitional costs associated with department, operational or overall company restructuring efforts, including geographic alignments.
 

Conference Call
Beginning this quarter, Tucows is evolving the format of its quarterly conference calls.  Concurrent with the dissemination of this news release, management’s pre-recorded remarks discussing the quarter and outlook for the Company have been posted to the Company’s web site at http://www.tucows.com/investors/financials.  In lieu of the usual question and answer period on past calls, for the next seven days (until Wednesday, August 15), shareholders and analysts can submit questions to Tucows’ management at ir@tucows.com. Management will post responses to questions of general interest to the Company’s web site at http://www.tucows.com/investors/financials/ on Wednesday, August 22 at 9:00 a.m. ET.  Questions that are more specific will be responded to directly. All questions will receive a response.

About Tucows
Tucows is a provider of network access, domain names and other Internet services. Ting (https://ting.com) delivers mobile phone service and fixed Internet access with outstanding customer support. OpenSRS (http://opensrs.com) and Enom (http://www.enom.com) manage a combined 24 million domain names and millions of value-added services through a global reseller network of over 38,000 web hosts and ISPs. Hover (http://hover.com) makes it easy for individuals and small businesses to manage their domain names and email addresses. More information can be found on Tucows’ corporate website (http://tucows.com).

 
Tucows  Inc.
Consolidated Balance Sheets
(Dollar amounts in thousands of U.S. dollars)
     
  June 30, December 31,
  2018 2017
  (unaudited) (unaudited)
     
Assets    
     
Current assets:    
Cash and cash equivalents $11,161  $18,049
Accounts receivable  12,214   12,376
Inventory  3,248   2,944
Prepaid expenses and deposits  15,428   14,186
Prepaid domain name registry and ancillary services fees, current portion  94,754   103,302
Income taxes recoverable  3,137   3,004
Total current assets  139,942   153,861
     
Prepaid domain name registry and ancillary services fees, long-term portion  20,701   23,701
Property and equipment  34,538   24,620
Contract costs  1,354   -
Intangible assets  53,693   58,414
Goodwill  90,054   90,054
Total assets $340,282  $350,650
     
     
Liabilities and Stockholders' Equity    
     
Current liabilities:    
Accounts payable $7,340  $7,026
Accrued liabilities  6,770   6,412
Customer deposits  12,934   15,255
Derivative instrument liability  337   -
Deferred rent, current portion  21   21
Loan payable, current portion  17,721   18,290
Deferred revenue, current portion  122,976   129,155
Accreditation fees payable, current portion  1,099   1,175
Income taxes payable  1,477   1,226
Total current liabilities  170,675   178,560
     
Derivative instrument liability, long-term portion (note 5)  27   -
Deferred revenue, long-term portion  29,075   31,427
Accreditation fees payable, long-term portion  269   289
Deferred rent, long-term portion  126   130
Loan payable, long-term portion  51,012   58,634
Deferred Gain  258   429
Deferred tax liability  19,577   19,834
     
Redeemable non-controlling interest  -   1,136
     
Stockholders' equity:    
Preferred stock - no par value, 1,250,000 shares authorized; none issued and outstanding  -   -
Common stock - no par value, 250,000,000 shares authorized; 10,603,366 shares issued and outstanding as of June 30, 2018 and 10,583,879 shares issued and outstanding as of December 31, 2017  15,548   15,368
Additional paid-in capital  2,931   2,167
Retained earnings  51,027   42,676
Accumulated other comprehensive income  (243)  -
Total stockholders' equity  69,263   60,211
Total liabilities and stockholders' equity $340,282  $350,650
     


 
Tucows  Inc.
Consolidated Statements of Operations
(Dollar amounts in thousands of U.S. dollars)
         
  Three months ended June 30,
 Six months ended June 30,
  2018 2017 2018 2017
  (unaudited) (unaudited)
         
Net revenues$81,087 $84,223 $176,882 $153,791 
         
Cost of revenues:        
Cost of revenues 54,501  59,445  123,473  108,756 
Network expenses (*) 2,701  2,261  5,275  4,604 
Depreciation of property and equipment 1,228  714  2,359  1,305 
Amortization of intangible assets 499  455  998  836 
Total cost of revenues 58,929  62,875  132,105  115,501 
         
Gross profit 22,158  21,348  44,777  38,290 
         
Expenses:        
Sales and marketing (*) 7,852  7,447  16,217  14,667 
Technical operations and development (*) 2,355  1,798  4,450  3,492 
General and administrative (*) 4,256  3,285  8,786  6,742 
Depreciation of property and equipment 102  165  203  331 
Loss on disposition of property and equipment -  2  -  2 
Amortization of intangible assets 1,827  1,608  3,659  2,989 
Loss (gain) on currency forward contracts 52  (27) 49  (61)
Total expenses 16,444  14,278  33,364  28,162 
         
Income from operations 5,714  7,070  11,413  10,128 
         
Other income (expenses):        
Interest expense, net (951) (970) (1,847) (1,838)
Other income, net 73  225  197  354 
Total other income (expenses) (878) (745) (1,650) (1,484)
         
Income before provision for income taxes 4,836  6,325  9,763  8,644 
         
Provision for income taxes 1,228  1,083  2,411  958 
Net income before redeemable non-controlling interest 3,608  5,242  7,352  7,686 
         
Redeemable non-controlling interest -  (117) (26) (243)
         
Net income attributable to redeemable non-controlling interest -  117  26  243 
Net income for the period 3,608  5,242  7,352  7,686 
         
Other comprehensive income, net of tax        
Unrealized income (loss) on hedging activities (273) 143  (256) 329 
Net amount reclassified to earnings 13  (17) 13  (98)
Other comprehensive income (loss) net of tax of $84 and and $71 for the three months ended June 30, 2018 and  June 30, 2017, $78 and $131 for the six months ended June 30, 2018 and  June 30, 2017 (260) 126  (243) 231 
         
Comprehensive income, net of tax for the period$3,348 $5,368 $7,109 $7,917 
         
Basic earnings per common share$0.34 $0.50 $0.69 $0.73 
         
Shares used in computing basic earnings per common share 10,597,228  10,528,219  10,592,994  10,501,407 
         
Diluted earnings per common share$0.33 $0.49 $0.68 $0.71 
         
Shares used in computing diluted earnings per common share 10,803,007  10,793,031  10,797,017  10,785,685 
         
         
         
(*) Stock-based compensation has been included in expenses as follows:        
Network expenses$28 $3 $84 $8 
Sales and marketing$245 $61 $431 $120 
Technical operations and development$174 $58 $351 $119 
General and administrative$168 $191 $327 $384 
         


 
Tucows  Inc.
Consolidated Statements of Cash Flows
(Dollar amounts in thousands of U.S. dollars)
         
   Three months ended June 30,   Six months ended June 30, 
  2018 2017 2018 2017
Cash provided by: (unaudited) (unaudited)
Operating activities:        
Net income for the period$3,608 $5,242 $7,352 $7,686 
Items not involving cash:        
Depreciation of property and equipment 1,330  879  2,562  1,636 
Loss on write off of property and equipment -  9  -  9 
Amortization of debt discount and issuance costs 69  80  139  147 
Amortization of intangible assets 2,326  2,064  4,657  3,825 
Change in capitalized contract costs 25  -  50  - 
Deferred income taxes (recovery) (445) (2,885) (492) (1,565)
Excess tax benefits on share-based compensation expense (197) (1,182) (341) (2,171)
Amortization of deferred rent (4) 1  (4) 5 
Loss on disposal of domain names 28  7  65  18 
Other income (42) (128) (171) (257)
Loss (gain) on change in the fair value of forward contracts 46  (163) 43  (301)
Stock-based compensation 615  313  1,193  631 
Change in non-cash operating working capital:        
Accounts receivable 471  (905) 162  (864)
Inventory (350) (1,267) (304) (1,096)
Prepaid expenses and deposits (717) 1,186  (1,242) (2,371)
Prepaid domain name registry and ancillary services fees 204  2,976  11,548  (2,513)
Income taxes recoverable 165  2,513  430  (147)
Accounts payable (1,862) (592) 270  (4,038)
Accrued liabilities (401) (1,818) 358  13 
Customer deposits (46) 3,152  (2,321) 3,068 
Deferred revenue 1,067  (1,273) (8,531) 8,968 
Accreditation fees payable (136) (78) (96) (149)
Net cash provided by operating activities 5,754  8,131  15,327  10,534 
         
Financing activities:        
Proceeds received on exercise of stock options 32  85  39  105 
Payment of tax obligations resulting from net exercise of stock options (141) (609) (288) (1,322)
Proceeds received on loan payable 2,500  -  2,500  86,998 
Repayment of loan payable (6,253) (4,572) (10,825) (10,830)
Payment of loan payable costs -  (13) (4) (604)
Net cash (used in) provided by financing activities (3,862) (5,109) (8,578) 74,347 
         
Investing activities:        
Additions to property and equipment (7,319) (2,909) (12,436) (6,602)
Acquisition of a portion of the minority interest in Ting Virginia, LLC -  -  (1,200) (2,000)
Acquisition of Enom Incorporated, net of cash -  -  -  (76,238)
Acquisition of intangible assets -  -  (1) - 
Net cash used in investing activities (7,319) (2,909) (13,637) (84,840)
         
Decrease in cash and cash equivalents (5,427) 113  (6,888) 41 
         
Cash and cash equivalents, beginning of period 16,588  15,033  18,049  15,105 
Cash and cash equivalents, end of period$11,161 $15,146 $11,161 $15,146 
         
Supplemental cash flow information:        
Interest paid$961 $975 $1,862 $1,848 
Income taxes paid, net$2,240 $2,663 $3,577 $5,006 
         
Supplementary disclosure of non-cash investing and financing activities:        
Property and equipment acquired during the period not yet paid for$258 $232 $258 $232 
         


 
Reconciliation of Net income to Adjusted EBITDA
(Dollar amounts in thousands of U.S. dollars)
         
  Three months ended June 30,  Six months ended June 30, 
   2018 2017 2018 2017
  (unaudited) (unaudited)
          
Net income for the period $3,608$5,242 $7,352$7,686 
Depreciation of property and equipment 1,330 879  2,562 1,636 
Amortization of intangible assets 2,326 2,063  4,657 3,825 
Interest expense, net 951 970  1,847 1,838 
Provision for income taxes 1,228 1,083  2,411 958 
Stock-based compensation 615 313  1,193 631 
Unrealized loss (gain) on change in fair value of forward contracts 46 (20) 43 (38)
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities 282 (283) 459 (334)
Acquisition and other costs1 802 127  1,043 509 
         
Adjusted EBITDA$11,188$10,374 $21,567$16,711 
         
         
1Acquisition and other costs represents transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, primarily related to our acquisition of Enom in January 2017. Expenses include severance or transitional costs associated with department, operational or overall company restructuring efforts, including geographic alignments.
         

This release includes forward-looking statements as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995 including statements regarding our expectations regarding our future financial results and, including, without limitation, our expectation regarding our ability to realize synergies from the Enom acquisition and our expectation for growth of Ting Internet. These statements are based on management’s current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ materially from those described in the forward-looking statements. Information about other potential factors that could affect Tucows’ business, results of operations and financial condition is included in the Risk Factors sections of Tucows’ filings with the Securities and Exchange Commission. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. All forward-looking statements are based on information available to Tucows as of the date they are made. Tucows assumes no obligation to update any forward-looking statements, except as may be required by law.

Tucows, Ting, OpenSRS, Enom and Hover are registered trademarks of Tucows Inc. or its subsidiaries.

Contact:
Lawrence Chamberlain
Loderock Advisors
(416) 519-4196
lawrence.chamberlain@loderockadvisors.com

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